China stock regulator probes market impact of automated trading

Samuel Shen, Pete Sweeney

3 Min Read

An investor stands in front of an electronic board showing stock information at a brokerage house in Fuyang, Anhui province, China, July 28, 2015. REUTERS/Stringer

SHANGHAI (Reuters) - China’s securities regulator on Friday said it is investigating the impact of automated trading on the market, as Beijing intensifies pressure on its financial industry in the wake of a share-price plunge.

The China Securities Regulatory Commission (CSRC), in an announcement on its official microblog, also said it had restricted 24 stock trading accounts for suspected irregularities, including abnormal bids for shares and bid cancellations that might have impacted wider market performance.

The Chinese government has massively intervened on multiple fronts to rescue its stock market after it slumped over 30 percent in less than four weeks following June 12. But it has struggled to produce a sustainable turnaround.

It appears Beijing is trying to reinforce the “national team” of brokerages and banks that have pledged to buy and hold shares until markets recover. The effort could be sabotaged if sophisticated investors use fancy trading techniques to profit from volatility or manipulate prices.

In addition to moving more state and private money into the stock market to stem a panic, Beijing has also campaigned against “malicious short selling”, which some have blamed for the precipitous slide.

Heavy regulator pressure has been applied to trading in derivatives, especially index futures, and now regulators appears to be concerned about the impact of automated trading strategies.

Wang Feng, CEO of Alpha Squared Capital, a Chinese hedge fund that uses such strategies, said his business is unlikely to be affected.

“The CSRC is only targeting those who use program trading to frequently submit and then cancel bids, thus disturbing the market and manipulating prices,” he said.

SEEKING A SCAPEGOAT?

“Such a practice is closely watched by regulators in the U.S. as well.”

However, many Chinese professional investors have accused Beijing of making derivatives and other trading strategies a scapegoat, which they fear is hobbling efforts to upgrade China’s financial industry.

As Chinese stock markets are still up about 50 percent in the past 12 months, many investors say Beijing is overreacting, although others contend the rally’s highly leveraged nature implies a wider economic risk if indexes collapse.

Many funds management companies have invested heavily in staff and technology to profit from China’s recently developed derivatives markets and from using high frequency or algorithmic trade to make money from small movements in stock prices, as in the U.S.

“How do you define what is malicious?” said one hedge fund manager. “The changing rules have a big impact on hedge funds’ businesses, preventing them from executing their strategies properly.”